What awaits for middle class in this Budget?

The Union Budget 2018-19 is only a few weeks away and it is Finance Minister Arun Jaitley's last full budget before the General Elections of 2019. As the 2019 general election is around the corner, it is likely that the government will try to woo the middle class with tax sops.

Accoding to a PTI report, the ministry was considering a proposal to increase the tax exemption limit from the existing Rs 2.5 lakh per annum to at least Rs 3 lakh if not 5 lakh. 

The government might also reduce tax rate on insurance premium.

Besides, the tinkering of tax slab is also being actively considered by the ministry to give substantial relief to middle-income group, especially the salaried class, to help them tide over the impact of retail inflation, which has started inching up, note ban and GST.

In the last Budget, Finance Minister Arun Jaitley left the slabs unchanged but gave marginal relief to small tax payer by reducing the rate from 10% to 5% for individuals having annual income between Rs 2.5-5 lakh. 

The government could lower tax rate by 10 % on income between 5-10 lakh, levy 20% rate for income between Rs 10-20 lakh and 30% for income beyond Rs 20 lakh, the report said. 

At present, there is no tax slab for income between 10-20 lakh.

“Considering the steep rise in cost of living due to inflation, it is suggested that basic limit for exemption and other income slabs should be enhanced to give benefit to low income group. The income trigger for peak rate in other countries is significantly higher,” industry chamber CII said in its pre-Budget memorandum to the finance ministry.

The industry chambers want the government to reduce peak tax slab to 25%. However, it is unlikely that the ministry will agree to the proposal as it was already dealing with the widening fiscal deficit issue. 

The fiscal deficit target has been pegged at 3.2% of the GDP for 2017-18. Subdued indirect tax collection because of due to the implementation of goods and services tax from July 1 last year has put pressure on the coffer. 

According to industry body Ficci, there is a likelihood that demonetisation effects may linger on for some more months and hence there is a need to further boost demand and therefore, the government should consider revision of income tax slabs, by raising the income level on which peak tax rate would trigger. 

“This would improve purchasing power and create additional demand. For individual taxpayers, 30% tax rate should be applicable only if the income is above Rs 20 lakh. Additionally, interest rates should be lowered to enable affordable finance for conducting business operation and expansion,” the report said citing Ficci.

Chambers have suggested re-introduction of the standard deduction for salaried employees to at least Rs 1 lakh to ease the tax burden of them and keeping in mind the rate of inflation and purchasing power of the salaried individual.
Standard deduction, which was available to the salaried individuals on their taxable income, was abolished with effect from assessment year 2006-07.

This section constitutes a big portion of the electorate. Accoding to a National Council for Applied Economic Research's (NCAER) study in 2016, there were 31.4 million middle-class households (160 million individuals) in the country. 
A family with an annual income between Rs 3.4 lakh to Rs 17 lakh (at 2009-10 price levels) falls in the middle-class category, according to the study.